Friday, May 27, 2011

Here's an update to an interesting chart that shows the three major components of the Personal Consumption Deflator. The main attraction here is the huge divergence between the level of durable goods prices, which have fallen by about 25% since 1995, and the ongoing rise in the prices of services and nondurable goods, which have risen about 50%.

As I noted last month, there is a reason why durable goods began to decline (for the first time ever) in 1995: that was the year that China first started pegging its currency to the dollar (thus stabilizing and eventually strengthening it), which in turn set the foundation for China's strong export-led growth in the years to follow. Cheap Chinese imported goods have helped keep U.S. inflation low, while at the same time boosting U.S. standards of living. The services component of the deflator is a good proxy for wages, so the chart is telling us that an hour's worth of work today buys the typical worker a whole lot more in the way of durable goods that it did 15 years ago (actually about twice as much).